Monday, August 22, 2011

In university classrooms—and especially the Obama White House—fancy theories of macroeconomics defy basic common sense.

Christina Romer, the University of California at Berkeley economics professor and President Obama's first chief economist, once relayed the old joke that "there are two kinds of students: those who hate economics and those who really hate economics." She doesn't believe that, but it's true. I'm surprised how many students tell me economics is their least favorite subject. Why? Because too often economic theories defy common sense. Alas, the policies of this administration haven't boosted the profession's reputation.

Consider what happened last week when Laura Meckler of this newspaper dared to ask White House Press Secretary Jay Carney how increasing unemployment insurance "creates jobs." She received this slap down: "I would expect a reporter from The Wall Street Journal would know this as part of the entrance exam just to get on the paper."

Mr. Carney explained that unemployment insurance "is one of the most direct ways to infuse money into the economy because people who are unemployed and obviously aren't earning a paycheck are going to spend the money that they get . . . and that creates growth and income for businesses that then lead them to making decisions about jobs—more hiring."

That's a perfect Keynesian answer, and also perfectly nonsensical. What the White House is telling us is that the more unemployed people we can pay for not working, the more people will work. Only someone with a Ph.D. in economics from an elite university would believe this.

I have two teenage sons. One worked all summer and the other sat on his duff. To stimulate the economy, the White House wants to take more money from the son who works and give it to the one who doesn't work. I can say with 100% certainty as a parent that in the Moore household this will lead to less work.

Economic bimboism is rampant in Washington. The Center for American Progress held a forum earlier this summer arguing that raising the minimum wage would create more jobs. For this to be true, you have to believe that the more it costs a business to hire a worker, the more workers companies will want to hire.

A few months ago Mr. Obama blamed high unemployment on businesses becoming "more efficient with a lot fewer workers," and he mentioned ATMs and airport kiosks. The Luddites are back raging against the machine. If Mr. Obama really wants to get to full employment, why not ban farm equipment?

Or consider the biggest whopper: Mr. Obama's thoroughly discredited $830 billion stimulus bill. We were promised $1.50 or even up to $3 of economic benefit—the mythical "multiplier"—from every dollar the government spent. There was never any acknowledgment that for the government to spend a dollar, it has to take it from the private economy that is then supposed to create jobs. The multiplier theory only works if you believe there's a fairy passing out free dollars.

How did modern economics fly off the rails? The answer is that the "invisible hand" of the free enterprise system, first explained in 1776 by Adam Smith, got tossed aside for the new "macroeconomics," a witchcraft that began to flourish in the 1930s during the rise of Keynes. Macroeconomics simply took basic laws of economics we know to be true for the firm or family—i.e., that demand curves are downward sloping; that when you tax something, you get less of it; that debts have to be repaid—and turned them on their head as national policy.

As Donald Boudreaux, professor of economics at George Mason University and author of the invaluable blog Cafe Hayek, puts it: "Macroeconomics was nothing more than a dismissal of the rules of economics." Over the years, this has led to some horrific blunders, such as the New Deal decision to pay farmers to burn crops and slaughter livestock to keep food prices high: To encourage food production, destroy it.

The grand pursuit of economics is to overcome scarcity and increase the production of goods and services. Keynesians believe that the economic problem is abundance: too much production and goods on the shelf and too few consumers. Consumers lined up for blocks to buy things in empty stores in communist Russia, but that never sparked production. In macroeconomics today, there is a fatal disregard for the heroes of the economy: the entrepreneur, the risk-taker, the one who innovates and creates the things we want to buy. "All economic problems are about removing impediments to supply, not demand," Arthur Laffer reminds us.

So here we are, three years of mostly impotent stimulus experiments and the economy still hobbled. Keynesians would be expected to be second-guessing the wisdom of their theories. Instead, Prof. Romer recently complained that the political system will not allow Mr. Obama to "go back and ask for more" stimulus.

Monday, August 15, 2011

In 1887 Alexander Tyler, a Scottish history professor at the University of Edinburgh, had this to say about the fall of the Athenian Republic some 2,000 years prior:

"A democracy is always temporary in nature; it simply cannot exist as a permanent form of government. A democracy will continue to exist up until the time that voters discover that they can vote themselves generous gifts from the public treasury. From that moment on, the majority always votes for the candidates who promise the most benefits from the public treasury, with the result that every democracy will finally collapse over loose fiscal policy, (which is) always followed by a dictatorship."

"The average age of the world's greatest civilizations from the beginning of history, has been about 200 years. During those 200 years, these nations always progressed through the following sequence:

From bondage to spiritual faith; From spiritual faith to great courage; From courage to liberty; From liberty to abundance; From abundance to complacency; From complacency to apathy; From apathy to dependence; From dependence back into bondage."

Professor Joseph Olson of Hamline University School of Law in St. Paul , Minnesota , points out that in the last Presidential election:

Number of States won by: Obama: 19 McCain: 29 Square miles of land won by: Obama: 580,000 McCain: 2,427,000 Population of counties won by: Obama: 127 million McCain: 143 million Murder rate per 100,000 residents in counties won by: Obama:13.2 McCain: 2.1

Olson adds: "In aggregate, the map of the territory McCain won was mostly the land owned by the taxpaying citizens of the country. Obama territory mostly encompassed those citizens living in low income tenements and living off various forms of government welfare..."

Olson believes the United States is now somewhere between the "complacency and apathy" phase of Professor Tyler's definition of democracy, with some forty percent of the nation's population already having reached the "governmental dependency" phase.

Friday, August 12, 2011

This short post by Alex Tabarrok is well worth thinking about….

The rags to riches to rags story of a poor, unemployed fellow who wins the lottery, blows the cash, and ends up just as poor and unemployed as he began is a common trope. (Here is a classic in the genre). In a paper just published in the Review of Economics and Statistics (gated, free version here), Hankins, Hoekstra and Skiba argue that the rags to riches to rags story has a systematic component.

The authors link records of lottery winners to bankruptcy records. The use of the lottery is a great randomization device, although obviously it restricts the sample to people who play the lottery.

The central finding is this: people who win large amounts are just as likely to end up bankrupt as people who win small amounts. People who win a large amount, $50,000 to $150,000, have a lower bankruptcy rate immediately after winning but a higher bankruptcy rate a few years later so the 5-year bankruptcy rate for the big winners is no lower than for the small winners. Amazingly, by the time the big winners do go bankrupt their assets and debts are not significantly different from those of the small winners. The big winners who ended up bankrupt could have paid off all of their debts but chose not to.

N.B. the result is not that most lottery winners go bankrupt or that winning money doesn’t help people–the result, as Robin Hanson might say, is that bankruptcy isn’t about money.

Tuesday, August 9, 2011

A HUGE increase in the number of Gisborne people seeking budgeting advice has contributed to a drastic drop in demand for food bank services, even as living costs and unemployment levels rise.

Three Gisborne food banks spoken to by The Herald said there had been a significant drop in the number of people seeking donations, with the city’s largest food bank — The Salvation Army — reporting a decrease of around 50 percent.

The decline in demand for help has coincided with a dramatic increase in people seeking advice on their budget — a result of Gisborne food banks’ collective efforts to break the intergenerational cycle of food dependence.

Gisborne food banks tightened their eligibility criteria in March last year, requiring regular clients to sign up for budgeting advice. The move had paid dividends 12 months later, said Salvation Army community ministries coordinator Beverley Hauiti.

“There has just been an incredible increase in the number of people who have wanted budget advice. We have three budget advisers on site here, but we still have a three-week waiting list of people who are just waiting to see one of us.”

Ms Hauiti said budget advisers were in high demand across Gisborne. “We work very closely as a collective unit with other food banks, and some of them also have waiting lists on their budget advice services.”

The Salvation Army had reaped the benefits of an attitude change, she said. “For a long time we have been the ambulance at the bottom of the cliff but we’re now trying to inform and inspire people to change the way they live and deal with the deeper issues.”

Gisborne Salvation Army Pastor Graham Medland agreed the budget advice service was likely to have influenced the dip in demand for food parcels.

“We have not sat down and analysed the figures, but I think the increase in people enrolled in our budget advice services has certainly had an effect there.”

The manager of another Gisborne food bank said it had also had fewer requests in recent months, and believed the popularity of budget advice services was making the difference. “We refer people to budget advice as well and have had a lot of good feedback from it. I think it’s a really positive sign that people are taking more responsibility.”

The unemployment rate for the East Coast rose 2.4 percent in the quarter ended March 2011, and sits at 9.8 percent — 3.2 percent higher than the national average.

Saturday, August 6, 2011

All three articles on the exchange rate in the Herald at the moment show (again) that the financial economics texts which say “don’t bother even trying to predict exchange rates” are on the money.

Evidence and theory about market processes are roundly hated by journos, pundits and news paper analysts. After all – if its true you can’t pick this stuff, what are they to do?

All the articles bemoan the “high exchange rate”, a couple dish out advice – to the Reserve Bank and anyone else silly enough to listen - as to how to knock the guts out of the exchange rate. All were totally out of date with 24 hours of publication as the dollar danced down from touching $0.89 to embracing $0.83.

My test is always “so you say it’s too high? How many short contracts are you holding?” The answer is always, predictably (and rationally of course – since it is a mugs game only a “commentator” would think they can convince someone to believe) – “None”. No money where mouth is.